U.S. consumers filled their shopping baskets in January, undaunted by economic and geopolitical uncertainties, as retail sales outside the auto sector posted their biggest rise in more than two years.

Separate government data released on Thursday showed the ranks of Americans seeking first-time jobless benefits thinned last week, a small ray of hope for the gloomy labor market.

"I think we're pulling out of this soft period we had in the fourth quarter," said Henry Willmore, chief U.S. economist at Barclays Capital in New York. "I think there are some signs that things are picking up."

Retail sales for January fell 0.9 percent, pulled down by a sharp drop in demand for cars as automakers cut back on financial incentives, the Commerce Department said.

However, excluding autos and parts, sales surged 1.3 percent -- the largest rise since a matching gain in September 2000 and far ahead of expectations of a 0.5 percent rise.

"American consumers are holding up not only the U.S. economy but the global economy as well," said Bill Cheney, chief economist at John Hancock Financial Services Inc.

"Their spending will remain crucial because the conflict with Iraq and the broader geopolitical uncertainties are keeping businesses on the sideline."

U.S. Treasury bond prices pared their gains after the report, but then surged on growing tension about the threat of terror attacks, driving two-year yields to all-time lows.

Stock prices ended the day slightly lower, also bothered by war and security fears. The Dow Jones industrial average lost 8.3 points to end at 7,749.87.

The U.S. economy crawled ahead at a 0.7 percent pace in the final three months of 2002 and economists polled by the Blue Chip newsletter expect, on average, that it will expand at an annual rate of 2.6 percent in the first quarter.

Consumer spending, which accounts for about two-thirds of economic activity, has been one of the areas of strength in the otherwise lackluster economy.

On Tuesday, Federal Reserve Chairman Alan Greenspan said consumers have been a "major factor" in helping the economy in the last couple of years when business investment and inventory sectors faced "very difficult problems."

He noted consumer spending has been in part supported by falling mortgage rates and rising home values which have allowed consumers to refinance home loans and extract equity which they have used for purchases.

The nation's no. 2 mortgage finance company, Freddie Mac said on Thursday mortgage rates stayed under 6 percent for a record eighth straight week.

"Absent Iraq, even Alan Greenspan has a fairly bullish view on the economy," said Cheney at John Hancock.

"If he's right, the next Fed move will be a tightening sometime later this year. In the meantime, it seems clear that we shouldn't count on another rate cut any time soon."

In a Reuters survey of 22 primary dealers carried out on Tuesday, 19 said they expect no action on rates at either the Fed's March or May meetings.

Consumers flocked to building material and gardening equipment stores, where sales climbed 2.9 percent. There was also solid demand at food and beverage stores, and at health and personal care outlets as well. Sales at clothing and accessories stores rose a modest 0.3 percent.

A separate report from the Labor Department showed initial claims for unemployment aid fell by 18,000 to a seasonally adjusted 377,000 for the week ended Feb. 8. Wall Street economists had expected claims to dip to only 389,000.

Analysts have taken some solace from seeing the closely watched four-week moving average hold below 400,000 for several weeks. Some economists view claims above that level as a sign of a deteriorating job market.

"The labor market is moving sideways, but this gives you some hope that there is some firming up in the labor market data which could make us feel a little better about the recovery," said Carey Leahey, senior U.S. economist at Deutsche Bank Securities.

On the inflation front, the Labor Department said import prices in January rose sharply, but largely due to a 12.4 percent rise in the price of petroleum imports. The threat of war in the Middle East and a cut in Venezuelan oil output due to a workers' strike there have driven oil prices up more than 30 percent since the end of November.

Greenspan on Wednesday shrugged off inflation worries, saying data showed little evidence of price pressures.

For a more complete picture of inflation, tame for many months, analysts will look to the Labor Department's release next week of consumer and producer price reports.